Private Economists, BOJ at Odds Over Forecasts

Will private economists or the Bank of Japan be more accurate in predicting price levels in the current fiscal year?

Bloomberg News

Good on economic growth forecasts, bad on inflation–or is it the other way round?

Since Haruhiko Kuroda took the helm last year, the Bank of Japan’s growth predictions for the economy and prices have been at odds with the views of private economists.

As Mr. Kuroda looks to influence price expectations and achieve 2% price growth in two years, he has openly criticized economists for inflation forecasts he sees as too pessimistic.

In an interview with CNBC earlier this month, the BOJ governor said private economists were “consistently wrong” with their price forecasts over the past 12 months.

While that’s mostly true, is it fair to criticize others without acknowledging your own similar failings?

Some aggrieved economists might take issue with Mr. Kuroda’s comment given that the BOJ’s projections for the country’s growth rate have proven less accurate than those of many economists.

With a faster-than-expected annualized growth rate of 5.9% in the January-March period, Japan’s economy grew 2.3% in the last fiscal year that ended March 31. The figure for the whole year matches the average forecast of 40 private economists polled a year ago by the Japan Center for Economic Research–though, as ever, the government figure will undergo multiple revisions.

The central bank forecast at the beginning of the last fiscal year was for an expansion of 2.9%, but it was forced to repeatedly lower its view closer to the forecast of the economists as the year went on.

On the inflation front, though, the BOJ has been more accurate than private economists. The closely monitored consumer price index, stripping out volatile perishable food prices, rose 0.8% in the last business year. That was well above the economists’ forecast for a 0.27% gain and compares with a BOJ prediction for a 0.7% rise.

In the latest edition of the bank’s semiannual outlook report, issued late April, the bank laid out a rosy picture of inflation rising around 2.0% for two straight years in its projection period covering the end of March 2017, despite its view that growth will slow. A majority of BOJ policy board members think a tightening labor market and rising inflation expectations will lead to higher wages and higher inflation.

Most private economists are still skeptical of such a view, however.

Yoshimasa Maruyama, chief economist at Itochu Corp, says the question is “how much those price-boosting elements will be able to offset downward pressure stemming from an expected slowdown in growth.”

Mr. Maruyama, an economist whose predictions largely matched Thursday’s GDP figures, now expects growth to contract by the same degree–to fall by an annualized 6.0%–in the current quarter as consumption slumps in response to a front-loading of demand before the sales tax increase in April. His growth forecast for the current fiscal year is 0.5%, about half the BOJ’s prediction of 1.1%.

The latest JCER survey of 42 economists shows they expect 0.72% growth and a rise of 0.99% in the CPI after stripping out the effects of the tax increase for the current fiscal year.

But are past results an indication of future performance?

While the BOJ is sticking to its bullish view on inflation, private economists are continuing to maintain their view that the bank’s 2% target by next spring is out of reach and that the central bank will be forced to take additional easing action later this year or early next year.

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